YHOO: Has Marissa Mayer Finally Lost Her Shine?

Yahoo (YHOO[1]) investors were looking for signs of life in Tuesday evening’s earnings report — specifically in the company’s core display advertising business.

They didn’t get ‘em … and YHOO stock wads headed lower as a result.

Fourth-quarter display revenue (excluding fees Yahoo pays to partners) was $491 million, a 6% decline from a year earlier and shy of the $500 million analysts expected. Even worse, the company sold 3% more ads (excluding South Korea, which the company quit in 2012) but prices fell 7% — Yahoo sold more of its inventory using online auctions, which typically results in lower prices for publishers.

YHOO stock — which has surged 85% during the past year amid growing investor optimism about Yahoo’s investments in the Chinese Internet company Alibaba and Yahoo Japan — was down roughly 5% in early after-hours trading.

Marissa Mayer’s image wasn’t doing so well, either.

Mayer Isn’t Righting the YHOO Ship

The seeds of Yahoo’s troubles were sown long before Mayer started working there. Previous CEOs such as Terry Semel, Scott Thompson, Carol Bartz and Jerry Yang tried and failed to bring the company back to its glory days. All failed for a variety of reasons.

Still, when Mayer was hired in 2012, hopes among investors were high. And she receives credit for boosting Yahoo’s traffic for the first time in years, as well as her progress in furthering Yahoo’s mobile business. She has made more than two dozen acquisitions including last year’s $1.1 billion of the popular blogging site Tumblr. In addition, Mayer has overseen long-overdue overhauls of key YHOO features such as Flickr and has planned “magazines” featuring former New York Times technology columnist David Pogue among others. These magazines are catching on with users, according to Mayer.

None of these efforts, though, appears to have made much of a difference on the balance sheet — at least not yet.

Speaking on Yahoo’s video conference to discuss earnings, CEO Marissa Mayer said the company developed a “solid foundation for growth in 2013,” but she stressed it will take “multiple years” for the company to turn around — a thought she has floated multiple times before.

“I am very pleased with our progress in my first year as CEO,” Mayer said, adding that there will be a “modest acceleration in the second half of the year … We are committed to growth in 2014.”

To Mayer’s credit, one area of strength was search advertising, which excluding traffic acquisition costs rose 8% on a year-over-year basis. And overall, Yahoo’s non-GAAP earnings of 46 cents were 31% improved from the year-ago period and topped estimates of 38 cents.

Overall revenues of $1.2 million, however, were merely in line with forecasts. Meanwhile, YHOO guidance for non-GAAP profits of $130 million to $170 million fell below the mark, and its ex-TAC (traffic acquisition costs) revenue forecasts for $1.06 billion to $1.1 billion merely straddled analyst expectations for $1.08 billion[2].

Hardly the growth story YHOO stock holders needed to hear after several quarters of “just wait!”

Meanwhile, according to data from eMarketer[3], Yahoo was expected to see its share of the display advertising market slump to 7.7% in 2013, down from 11% in 2011. In 2014, it is expected to slump further to 6.7%. Even worse, YHOO is losing business at a time when the overall market and its rivals are reporting gains. Google (GOOG[4]) is expected to reach 20.7% market share in 2014, while Facebook (FB[5]) is anticipated to reach 16.2%.

The company’s core display advertising business has stagnated for the past few years, and earlier this month, Mayer canned Chief Operating Officer Henrique De Castro[6] — a former Google (GOOG[4]) colleague whom she personally recruited to be Yahoo’s point person with Madison Avenue.

Analysts pressed Mayer on the reasons for De Castro’s abrupt departure and if De Castro’s tenure was a failure, as it has been rumored, why he received a $40 million exit package.

“Ultimately, Henrique was not a fit,” Mayer said, adding that the decision to cut ties with De Castro was “regrettable” but “the right move for the company.”

Mayer had a lot of explaining to do given a New York Times[7] report that indicated that De Castro was temperamentally ill-suited for the job and amazingly “was not a charismatic salesman willing to schmooze with Madison Avenue marketers.”

I didn’t know there was such a thing as an advertising sales person who didn’t like to schmooze.

It appears Mayer will be taking on De Castro’s role herself — that means she will be more directly involved with the company’s sales force than she had been in the past. But it speaks volumes that Mayer isn’t replacing her former pal.

Bottom Line

There’s not much to like about YHOO after Tuesday’s earnings report, especially going forward. Mayer has been tasked with growing the business, and as seen on the revenue side, it’s just not happening yet.

But much like every CEO who is in the midst of a turnaround, Mayer still is asking Wall Street to be patient — something that’s becoming increasingly limited in supply.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.